No to Bernanke

The American Economics Association is meeting in Atlanta, where Simon says it is frigid. I went to an early-January conference in Atlanta once. There was a quarter-inch of snow, the roads turned to ice, and everything closed. All flights were canceled, so I and some friends ended up taking the train to Washington, DC, which had gotten two feet of snow, and eventually to New York.

Bernanke’s speech is largely a defense of the Federal Reserve’s monetary policy in the past decade, and therefore of the old Greenspan Doctrine dating back to the 1996 “irrational exuberance” speech–the idea that monetary policy is not the right tool for fighting bubbles. The Fed has gotten a lot of criticism saying that cheap money earlier this decade created the housing bubble, and I think it certainly played a role.

But I actually agree with Bernanke here:

“[T]he most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.”

(Note that the purpose of stronger regulation, according to Bernanke, is to constrain the housing bubble that he denied existed at the time–not to protect consumers.)

The problem, for the Greenspan-Bernanke legacy at least, is that the Fed is also the chief regulator of the financial system, with jurisdiction over all bank holding companies and primary responsibility for consumer protection statutes applying to all financial institutions. Here Bernanke makes a partial attempt at an apology:

“The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices. In 2005, we worked with other banking regulators to develop guidance for banks on nontraditional mortgages, notably interest-only and option-ARM products. In March 2007, we issued interagency guidance on subprime lending, which was finalized in June. After a series of hearings that began in June 2006, we used authority granted us under the Truth in Lending Act to issue rules that apply to all high-cost mortgage lenders, not just banks. However, these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

In other words, we did nothing until 2005, and then we didn’t do much. [Also see Update 2 below.]

I don’t really care about apologies. The more important question is what Bernanke and the Fed will do in the future. On that front, he has this to say:

“The Federal Reserve is working not only to improve our ability to identify and correct problems in financial institutions, but also to move from an institution-by-institution supervisory approach to one that is attentive to the stability of the financial system as a whole. Toward that end, we are supplementing reviews of individual firms with comparative evaluations across firms and with analyses of the interactions among firms and markets. We have further strengthened our commitment to consumer protection. And we have strongly advocated financial regulatory reforms, such as the creation of a systemic risk council, that will reorient the country’s overall regulatory structure toward a more systemic approach. The crisis has shown us that indicators such as leverage and liquidity must be evaluated from a systemwide perspective as well as at the level of individual firms.”

There are basically only two things in this paragraph, one of which is disingenuous at best. Bernanke claims that he is getting serious about consumer protection, yet he has lobbied against the Consumer Financial Protection Agency, which everyone who is serious about consumer protection wants. I’m disappointed that Bernanke would stoop to this kind of misleading rhetoric.

The other thing is a lot of talk about systemic risk. Yes, systemic risk is important. But all the words I hear about it, and the fact that the importance of systemic risk is one of the few things that everyone can agree on, are making me start to worry. Specifically, I wonder if a lot of regulatory apparatus aimed at systemic risk will serve as a distraction from old-fashioned regulation of individual institutions. Yes, it’s true that the thing that hit us in 2008 was systemic risk. But it’s also true that regulators already had the power to supervise Citigroup, Bank of America, Wachovia, Washington Mutual, Lehman Brothers, Bear Stearns, and Countrywide and force them to pare back their risky activities–and didn’t. Talking about systemic risk is a way of passing the buck–of excusing regulatory failure by saying that regulators didn’t have the authority to look at systemic risk. But the fact remains that someone looked at Citigroup’s range of businesses and its asset portfolio and decided it was a healthy bank.That was at least as big a problem.

I’ve been on the fence about Bernanke’s confirmation, mainly because I’m not so optimistic we’ll get anyone better from a policy standpoint, and we could certainly get someone worse from the standpoint of intelligence, knowledge, thoughtfulness, and work ethic. But now that I’ve read this speech, I’m against confirmation.

Update: I should clarify one thing. I am sure there are better people out there. I’m less confident about whomever Obama and his advisers would pick. This is a deeply centrist administration, at least on economic issues, and one that is absolutely not going to make a major policy shift anytime soon; whether or not we agree with them, their current message is that they have done a good job fixing the financial system and running the economy. So I think that if Bernanke by some miracle were not confirmed, Obama would take pains to appoint someone with the same policy positions.

Update 2: Mike Konczal at Rortybomb points out what Bernanke left out of Bernanke’s defense of the Fed: the fact that the Fed actively ignored warnings going back to 1998. Funny how a factually correct statement can be deeply misleading.

I’ve been on the fence about Bernanke’s confirmation, mainly because I’m not so optimistic we’ll get anyone better from a policy standpoint, and we could certainly get someone worse from the standpoint of intelligence, knowledge, thoughtfulness, and work ethic. But now that I’ve read this speech, I’m against confirmation.

Well, I’m glad to hear that.

I should point out to anybody else vacillating over that rationale that firing somebody who badly screwed up, and whether or not his replacement is likely to be “any better”, are two completely separate issues and should never be confounded.

When there’s a monumental SNAFU, heads have to roll, on principle, even if no one was actually at fault.

But where there was such monumental fault, nothing could possibly be more demoralizing, and indeed more symptomatic of the underlying rot, than there being even the slightest question of firing those responsible.

The fact that even so many otherwise reasonable people have said they don’t know if Bennie should be fired because they don’t know who his replacement would be, and the facts that we’re not getting reform and that the looting continues, are all part of the same underlying decadence.

They all indicate that this is a people which has utterly lost its moral fiber and spiritual integrity.

But perhaps you agree that some apologies are valid ones (in the sense that yes indeed there are now really new insights) and some are very lame ones. I find it oftentimes revealing what type of apologies people come up with.

As far as the crisis is concerned, Bernanke presents v e r y lame apologies. As I have posted before: he is on the record, plenty of times, as having been blind towards the bubbles.

Bernanke: “.. In March 2007, we issued interagency guidance on subprime lending, which was finalized in June.”

So by June 2007 the FED finalized subprime guidance. Let’s see: by that time new subprime lending was almost over. Two months later a hedge fund spectacularly imploded due to subprimes bets, and subprime lending was finished. And with dry eyes Bernanke presents his guidance as action taken. This is more than pathetic; this is very worrisome.

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James: “I’ve been on the fence about Bernanke’s confirmation, mainly because I’m not so optimistic we’ll get anyone better from a policy standpoint, …”

This is a shocker. Surely, there must be enough people who could do a much better job as FED chairman from a people’s (not wall street’s) perspective!!

James,
Mildly surprised at your position on Bernanke. I have said many times on this site I think Alan Blinder is the best man for the job. To me, I think there are in fact few who strike me as being blatantly better than Bernanke (other than Alan Blinder). But I respect you and others who have put their stances out there. I guess Alice Rivlin is in some kind of semi-retirement. Who else would be good for the job?? Some people have mentioned Janet Yellen. Born in Brooklyn, I assume she has the appropriate bloodlines, but other than “Oh ya, we’ve never had a female for this job have we??” I honestly don’t know what makes Yellen special.

Russ: “The fact that even so many otherwise reasonable people have said they don’t know if Bennie should be fired because they don’t know who his replacement would be, and the facts that we’re not getting reform and that the looting continues, are all part of the same underlying decadence.”

I did not see your comment when I started typing mine, but I picked up on that too. (more than picked up: I had to read James’ posting twice and ended up in shock: 300 million Americans and no one better than Bubblenanke??!)

Keeping short term interest too low (not only that, but the inesorable lowering of the reserve ratio) it encouraged excessive lending across the board and people and institutions bought head on into garbage products desperate for yield.

Here is a post I put up recently at Biil Mitchell’s place on this subject:

I was on the ground in California at the time that this was unfolding. I can report that the principal cause of the problem was, surprise, red hot demand. Obviously, there was demand on the part of buyers looking to make a quick buck. Later, others rushed to get in before they were shut out by skyrocketing prices. The second type of demand was the demand for mortgages to securitize and sell into “the giant pool of money” that was looking for the most lucrative yield on AAA securities in which to park. Mortgage brokers were hungry for prospects, because they were making gobs of money doing deals to meet this demand. There wasn’t a whole lot of rational thinking about consequences by either debtors or creditors. It was shear passion unleashed on both sides. This was a marriage made in hell.

The temptations were too great, and fraud became rampant. Buyers fudged or lied on documents. Mortgage brokers check even in the most obvious cases. I know a women with three kids, no husband, no job, and with a recent bankruptcy that easily got a mortgage. The firms competing for mortgages to securitize didn’t really care about what they were getting as long as the requisite paperwork was there. The buyers of the securities were dazzled by Wall Street names and AAA ratings. A lot of things converged and fed on each other.

This was a gigantic crime scene that hasn’t been investigated. The problem is more a forensic one than an economic one, as Bill Black and others have been saying for some time.

Were low rates implicated? Yes, to the extent that deals had to be structured that would pass muster with respect to the monthly. Rates had to be low enough so that the deal could work for at least a year or two. But interest rates weren’t all that big an issue either. Toward the end, many exotic loans were interest only, and finally, just what the buyer could afford, even if it wasn’t all the interest.

Meantime, people already in and way ahead were taking out seconds to buy other properties. It was pretty wild. Very few people bought with the idea of holding. As far as they were concerned, they were renting a property for a year or two to flip. Monthlies were also low enough for flippers to be able to carry properties for the time it would take to turn the deal around, usually only a matter of months. I saw one scrub lot sell for $112,00, be “improved,” and sell six months later for $250, 000. The improvements (well, septic, minimal road) were less that $30,000. Enterprising flippers could have several deals going at once. Early in the game, some people quit their day jobs and made millions in a year or two flipping houses.

Unfortunately, toward the end, a lot of people renting saw that things were getting away from them and if they didn’t jump in quickly they feared they’d be shut out of the market forever. Since all you needed was a warm pulse to get a mortgage, a lot of people were suckered in this way and are now deeply underwater. I know some of them, too. It wasn’t all buckets of gold for everyone.

The game could have ended with higher rates raising monthlies beyond reach, but instead it was the skyrocketing prices. It just got too expensive to carry these deals, and when the music started to slow down, the savvy people unloaded as quickly as they could. Prices peaked, buyers disappeared, and the people who were still in were stuck. It was quite a ride, but it was over. And it wasn’t just property owners that got hit. Many builders got stuck with unfinished projects and lots they were paying on. I have a friend who picked up some lots for development but got stick with one. He had bought it at a tax auction for $17,000. He had it on the market at the peak for $90,000 and began dropping his price but not quickly enough. Now comparable lots are being offered for $5000, and taking a long time to sell.

“I have said many times on this site I think Alan Blinder is the best man for the job. To me, I think there are in fact few who strike me as being blatantly better than Bernanke (other than Alan Blinder). But I respect you and others who have put their stances out there. I guess Alice Rivlin is in some kind of semi-retirement.”

Rivlin supports Bernanke’s reappointment. She’s out. Blinder strikes me as an even bigger bail out the banks lover than Bernanke. Got any other suggestions? How about Robert Shiller? Jamie Galbraith? Paul Krugman? Dean Baker? They would all be far better than Blinder, Rivlin, or Yellen, for that matter.

Bernanke just doesn’t get it, does he? He did not even mention the ‘originate to distribute’ Countrywide problem, CDOs and that whole nexus of perverse incentives and lack of controls that fed the bubble. He talks as if the “innovative instruments” that his old boss used to praise to the skies just dropped in from nowhere, rather than being products of a whole dysfunctional eco-system that should have been regulated out of existence.

Of course, he does not explain why regulatory action was way too little and much too late. The concept of regulatory capture is nowhere in the speech.

Nor does he remotely acknowledge that the last two bubbles created grossly wasteful excess capacity, destroying household wealth and bringing the whole capitalist system’s claim of efficiency in investment allocation into question.

It is so wrong! How can I explain it? Not one single of the lousily underwritten mortgages would have found a buyer had they not been packaged in AAA rated securities.

Any regulator blaming the “decline of underwriting standards of mortgages”, without recognizing that this decline was a direct function of the possibility of packaging true junk mortgages into securities that became AAA rated… and that the appetite for generating AAA rated securities was in itself a direct function of those regulations that gave these securities the benefit of generating unbelievable low capital requirements for the banks… does either not know what he is talking about as a regulator, or is not brave enough to stand up and admit the mistake.

Now that these unqualified regulators shall now go out and measure systemic risks without even understanding the systemic risk they produced with their regulations, would be truly laughable, was it not such a serious matter.

Am I missing something here or did Bernancke just argue against his own nomination? The problem was a failure of regulation. You’re the chief regulator so you failed.

“The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices.”

What the f**k is that? You made efforts to adress the problem and the end result of your efforts was the greatest meltdown since the depression?

That he would even dare to make this argument is offensive. The best way to think about his reappointment is not to ask if we could find someone better but could we possibly find someone worse. Its just like when the bankers argue for large bonuses to keep their “talent” from leaving.
You can’t do worse than zero and if the banks were run by monkees they could not have done worse. Seriously.

“I’ve been on the fence about Bernanke’s confirmation, mainly because I’m not so optimistic we’ll get anyone better from a policy standpoint, and we could certainly get someone worse from the standpoint of intelligence, knowledge, thoughtfulness, and work ethic.”

I’ve felt the same way. We could do far worse than Bernanke (i.e. Summers).

I always felt Bill Poole would be a good choice; he’s deeply knowledgeable, and is willing to mix things up with unpopular moves. He and Volcker are the only policy heads at the fed who have shown any ability to do this.

That being said, eliminating Bernanke will not solve the structural problems at the Fed. We’re acting like monetary policy is set by edict from one man, when we all know it’s done by a majority vote.

If you think you can kill a Hydra by cutting off only one of its heads… well, good luck with that…

Am I missing something here or did Bernancke just argue against his own nomination? The problem was a failure of regulation. You’re the chief regulator: you failed.

“The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices.”

What the f**k is that? The Fed made efforts to address –by Ben’s own account — the key problem and the end result was the greatest meltdown since the depression? That he would even dare to make this argument is offensive.
The best way to think about his reappointment is not to ask if we could find someone better but could we possibly find anyone worse? Its just like when the bankers say they need large bonuses to keep their “talent” from leaving.
You can’t do worse than zero. If monkeys ran the banks they could not — by definition — have done worse. Seriously. Same goes for the Fed President.

Short term rates aren’t run by the fed, but by the market. The Fed follows or announces as I call it.

Short term rates struggled to rise because the US economy struggled to grow after the dot.com boom. So instead, we see money flow into RE as a ‘safe’ investment from the tech storm, which in term started, the Loan problem which created the housing bubble. Since RE was the “rad” thing to do, mortgage companies began giving loans out like crazy to keep up demand, even though a majority of these loans began going downhill in quality about in mid-03.

Bush and his cronies didn’t care because it got GDP from the 1.5% annualized range to the 3.0% range for a couple of years.

Wasn’t proping up housing the national economic policy during the Bush’s years? Anyone remembers the “Ownership Society”? Where would the economy, post-tech-bubble-burst, be without this asset pumping? Where would the GDP be during Bush’s years ex housing? The housing bubble was the product of the failed economic policy in my opinion. And Greenspan, Bernanke, and the whole economic team all had blood on their hands. The pertinent question is how do we grow our economy going forward, post this extend-and-pretend period?

I hate the term “systemic risk” as it is a poor and even misleading descriptor, but we must understand that the way to fight the overabundance of risk in the finance arena is to create both strong regulations and positive incentives which would lead to the rebalancing of economic forces in our country. Included in the new regulations would be things like absolute transparency in all markets in which trades may impact the public at any level; require that all investment innovations be approved for use by the SEC or other appropriate agency or body; place specific limits on the percent of GDP occupied by any one firm (say .5%); reenact Glass-Steagall; reform lobbies far more than has been done; restrict campaign contributions in the areas of both hard and soft money. And, ditch Bernanke and replace him with someone with the competence of, say, Paul Vollker. That’s all we need to do, really!!

This article addresses a number of very significant points related to the global financial crisis. I also believe that much more could have been done, much earlier, and better by regulators to avoid or mitigate the devastating impact of these dramatic events.

If anyone is interested in finding out more about my personal view on this matter please read my working paper of October, 7th 2008 published on the SSRN.com website by the title ” Miraculous Financial Engineering or Toxic Finance? The Genesis of the U.S. Subprime Mortgage Loans Crisis and its Consequences on the Global Financial Markets and Real Economy”.
You may access the paper with the following link:

Furthermore, if anyone wishes to have an updated overview of the same issue and its future implications, I recommend reading the following forthcoming book “Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future” by Prof. Robert W. Kolb. Please see the book on through the following link:

“The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices.”

So much the worse because if it knew that there were “poor mortgage underwriting practices” present how could it have let those mortgages to become a part of AAA securities that even GSEs like Fanny Mae purchased? For instance a European buyer of an AAA security collateralized with subprime mortgages would have the right to assume that if the FED knew that the underwriting practices were poor that it would have done something more than “efforts”. The least it could have done is to call up the credit rating agencies and ask for an explanation…. and not rest until it has received a complete and full explanation.

Bayard “I hate the term “systemic risk” as it is a poor and even misleading descriptor”.

Absolutely! When in 2003 I wrote in a letter to the Financial Times “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” I was referring to the systemic risk of introducing regulations that could cause a malfunction of the system. Nowadays it seems that “systemic risk” definition has been reduced in absurdum to mean only the actors that are too large to cause a risk to the system.

Dear Professor Pezzuto. Your article is very good… but it could improve much by dwelling more in the real origins of this financial crisis… especially since it is there we should begin the reconstruction of the system.

The origin?

1. The bank regulators were allowed to impose as the only objective of their regulations their own personal boudoir fantasy of a world with no bank defaults… when they all should now that the possibility that the financial sector does not perform its functions in generating sustainable growth and improvement for the society, is so much worse than the risk of many banks not being able to repay their depositors.

2. The bank regulators simplistically thought that they could control the default risk of banks by imposing capital requirements that discriminated for risks… and thereby leveraging the carelessness by which generally investments or loans that are perceived as having low risk are managed.

3. The bank regulators acting in an extraordinary naive and gullible way though they could empower some few human fallible credit rating agencies to “perceive the risks” in the name of society… without running the risk of having these agencies captured by some antisocial elements which would sooner or later convince them to tripleA what was not worth a triple A.

4. The bank regulators allowed for extraordinary low requirements for banks when these were doing business with those who really did not need more benefits; like 1.6 percent for AAA rated clients and 0 percent in the case of the government.

While we might agree or disagree on the identity of a better Fed chair, the fact of the matter remains whomever it is must get Hon. Sen. Lieberman’s vote. Is this worth fighting for? As we ponder this, think of the rest of the FMOC, and think about, even if our perfect candidate is confirmed, how much power he will have to make meaningful changes.

I was not sure what he was trying to say regarding consumers, since the statement regarding them is buried in the middle of a paragraph that quickly moves on to issues of systemic risk.

I suppose since a complete financial meltdown is a top priority for all vested interests, it is the top priority for consumers as well.

However, if the esteemed Federal Reserve Chairman would posit that it is the only important consumer issue, or even suggest that this is the most helpful statement regarding consumers that could be made by a person in his position, he telegraphs this from an alternative reality that is far far away from being on another planet.

This recent financial crisis was facilitated by a large tier of economic / financial “experts” who were co-opted by big money and were (often unconciously) shielded from reality by economic / financial pseudo-theory.

I think the underlying reason that Bernanke, Geithner, Summers and the rest have stayed in positions of power and influence, can be summed up in two words: campaign finance.

The US is showing itself to be a system that can no longer deal with its problems.

Seems like you weren’t and somehow managed to survive, forcing the civilized world to endure more garbage of your kind. Do us all a favor, Murder Inc., draw a tub of hot water and go off in search of a razor blade.

Thanks for your valuable comments and recommended reading, which I will review with great interest.

One thing is sure to me, as formal Chief Risk Officer, and I guess to most other seasoned finance professionals in the world, with the available and standard metrics and tools in the risk management industry, it was practically impossible not to see what was really happening to the mortgage loans portfolios in terms of risk deterioration. American risk managers, after all, are the best experts in this field.

Considering all the existing levels of internal and external controls in the banks, and financial markets industry, some doubts on the internal and external control capabilities and effectiveness are more than legitimate.

Readers may find more updated clarifications on this matter in the forthcoming book by Prof. Robert W. Kolb by the title “Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future”. Please see the book on through the following link:

Why do you start from assuming they allowed themselves to be shamefully co-opted by big money? Why must you think them dishonest that way?

Why do we not start instead from the premise that these experts and regulators were just unqualified, almost plain dumb; and which was all made so much worse because they were able to practice a degenerating intellectual incest in their mutual admiration club, that one with the main offices in Basel and the clubhouse in the IMF.

That´s at least what I thought in November 2004, after the approval by the G10 Ministers in June 2004 of Basel II, when in the Financial Time I wrote “Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost – even at the cost of growth.”

Ivo Pezzuto writes “it was practically impossible not to see what was really happening to the mortgage loans portfolios in terms of risk deterioration”

Ivo you are absolutely wrong! It all happened because the regulators after having appointed the credit rating agencies as their risk sentries, they then went to sleep in a self congratulatory mode.

Any non gullible or not naïve regulator who had walked the streets of the real world, should have known that having given the credit rating agencies so much power these were bound to be co-opted, sooner or later, and the veritable sudden explosion in AAA rated securities was a sign that should have been seen by the regulators from miles and miles away… had they not been sleeping on the job.

Apparently there has been a misunderstanding in your interpretation of my message.
I have mentioned, that it was practically impossible to “Risk Managers” (managers of the Banks, primarily) not to see what was really happening to the mortgage loans portfolios in terms of risk deterioration”. As far as I know, analysts of the Rating Agency have somehow similar skills as internal risk managers of a bank. I am sure you will agree at least on these facts.

That is just what I have been asking for a long time. Problem is though that this is such a perfect opportunity for some to indulge in bank-bashing, and so they do not want to dilute it with some regulator-bashing. That is also why, whenever faulty regulations and regulators come up for discussion, that the immediate answer is that these were naturally just co-opted by the bad boys.

Just in case, mine is not a no to Bernanke specifically, I really do not know him enough… mine is a general no to the whole procedure on how regulatory bodies get integrated… because the last think needed, is for these to contain only regulatory buddies.

“Why do you start from assuming they allowed themselves to be shamefully co-opted by big money? Why must you think them dishonest that way?”

For two inter-related reasons.
1) things that make money, often seem justified by the fact that if you believe in the infallibility of free markets, you believe that the thing wouldn’t be successful in the first place unless it was ok.

2) Upton Sinclair paraphrse: “It is difficult to get a man to understand something when his salary [or his legalized payoffs] depend on his not understanding it.”

The speech was LAME. The analysis is a sad reminder of the kind of thinking that goes on at the Fed. Who puts together these kind of scatter charts one explanatory variable at a time, with pathetic least squares estimates to support his positions. Seems like third rate MBAs running the FED. Inspires a LOT of confidence, it does. This speech tells me how ready to be fired this man is.

As to replacements, we need a) more responsible monetary policy, and b) bank supervision. Hoenig, Lacker etc from the Fed’s own system. Feldstein or John Taylor from outside. AND PLEASE STOP MENTIONING DOVES LIKE JANET YELLEN AND BLINDER. They are as undistinguished in their real time track record as Bernanke is.

The conventional narrative of the housing/asset bubble of 2004-2007 is that the Fed kept rates too low for too long, and the availability of easy financing allowed investors to borrow heavily and bid up asset prices beyond their intrinsic value.

However, it seems that one could construct a different and perhaps more compelling narrative — that regressive tax policy was at least equally responsible for the formation of asset bubbles. I came to this realization while reflecting on the reportage of the BofA/Merrill paper “The Myth of the Overleveraged Consumer” (reported by zero hedge http://www.zerohedge.com/article/detailed-look-stratified-us-consumer?page=1, LA Times, and others). The conclusions drawn from those datasets were generally that the top 10% of wage-earners account for over 40% of consumption; therefore, economic stimulus in the form of tax cuts for that top 10% makes eminent sense.

What those who concluded thusly missed is that according to those same data, the top 10% account for over 85% of the wealth of the nation. With 85% of the wealth and only 40% of consumption, I conclude that the marginal propensity to consume of the top 10% of earners is lower than other segments of the population. Therefore, tax cuts intended as consumption stimulus would best be offered elsewhere.

Another question arises, however, namely “What do the top 10% do with their income if they don’t spend it?” The answer, also from the data cited by zero hedge, is “They invest it.” The natural conclusion is that tax cuts for the top 10% of earners would be a stimulus for investment much more than consumption. So, if one wanted to inflate the demand for investment assets, tax cuts for the rich would be a great strategy. I think it is more than a coincidence that this is exactly the strategy pursued in the US from 2001 to 2007. Stimulus dollars flowed to the portion of the population with the highest marginal propensity to invest, inflating the demand for many classes of investment vehicle beyond what could be supported by fundamentals — in other words, bubbles.

Well, lots of blame to throw around. Bernanke really should be gone. It’s a principle thing, as stated earlier. Optimally, everyone on the House Financial Services Committee should be gone as well. Just saying.

Me, I have one rule regarding real estate. When the dentist’s wife decides she’s getting into real estate, (and she or the doctor always does in a run up) I’m out. Works every time.